Wendy’s Earnings: Can Pretzels and Bacon Win the Day?

by Tom Taulli | November 4, 2013 2:45 pm

Wendy’s (WEN[1]) has been a long-time Wall Street laggard … until this year. For the year-to-date, Wendy’s stock is up a sizzling 60%, though that run faces a big test Thursday in the form of Wendy’s earnings.

However, based on the action of the past week — with the stock up about 2.5% — the bulls might be hard to dissuade.

The consensus estimate is for WEN to post revenues of $645.2 million, which would translate into a 1.4% increase on a year-over-year basis. Wendy’s earnings are expected to come to 6 cents a share, which would represent a doubling over the year-ago period’s profits.

WEN’s strategy is actually transformative: It wants to position itself as part of the “fast casual” market, rather than its current fast-food segment that it shares with the likes of McDonald’s (MCD[2]), Jack in the Box (JACK[3]) and Burger King (BKW[4]).

Given the outstanding stock performance enjoyed by other sector names, such as Chipotle (CMG[5]) and Panera (PNRA[6]), you could see why Wendy’s would want to join the gang. But is Wendy’s stock really a good fit?

It might seem like a stretch, but there are some factors worth considering.

What WEN Is Doing Right

In terms of the menu — where the difference between fast casual and fast food will really end up taking shape — Wendy’s has focused more on “premium” offerings, such as the Pretzel Bacon Cheeseburger and the Flatbread Grilled Chicken sandwich, both of which have produced encouraging results.

But WEN also is trying to find ways to lower its costs and drive higher margins. One important move is to focus on franchising; for example, this summer, the company began the process of selling 425 locations[7].

Meanwhile, WEN has been getting more creative with its marketing efforts, relying more on social media platforms like Facebook (FB[8]) and Twitter so as to target millennials.

Wendy’s also has been focused on paying back shareholders, boosting its dividend 25% this summer to 5 cents per share — good for a yield of 2.3%.

Despite all this, investors still might want to be cautious ahead of Wendy’s earnings report.

Wendy’s stock has something in common with the fast-casual group: a hefty valuation, currently around 32 times next year’s earnings. This compares to 22 for BKW, 18 for JACK and 16 for MCD.

Meanwhile, short sellers are starting to get interested in Wendy’s stock, with short interest at nearly 13% of the overall float — anything over 10% is worth taking note of.

Given the bearish camp starting to crowd around Wendy’s stock, a negative overreaction could be in the offing. WEN might be best avoided ahead of the report, which comes before the bell Thursday.

Tom Taulli runs the InvestorPlace blog IPO Playbook[9]. He is also the author of High-Profit IPO Strategies[10], All About Commodities[11] and All About Short Selling[12]. Follow him on Twitter at @ttaulli[13]. As of this writing, he did not hold a position in any of the aforementioned securities.